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April 8, 2013

Soccer Spurs Gabon to Shoot Beyond Oil

Sporting events are usually one of the greatest catalysts to spur a country into expanding its economy and investing in infrastructure, and the 2012 Coupe D’Afrique des Nations, Africa’s soccer championship, was no exception for Gabon.

The event, which Gabon co-hosted with Equatorial Guinea, took place against a fiery political backdrop for the African continent and amid great tensions in countries like Egypt, Tunisia, Libya and Mali, but it nevertheless gave the Gabonese government a huge incentive to undertake an ambitious public investment program that not only aimed to cater to the event itself, but also set the longer-term goal of transforming Gabon into a diversified economy by 2025, thereby reducing its dependence on its main export: oil.

Even though the West African nation is rich in natural resources including gold, manganese, iron and wood, the country is Sub-Saharan Africa’s fifth largest oil producer and still is almost wholly dependent on oil, which makes up 88% of its exports.

And unfortunately for Gabon, the large fiscal surpluses generated by the oil windfalls have shrunk drastically as a result of a decline in revenues partly associated with production disruption in 2012 and the huge increase in capital expenditures over the last three years, said Eric Paget-Blanc, lead analyst covering Gabon for Fitch Ratings.

“If the price of oil were to fall or if production were to suffer further setbacks resulting in a sustained decline in revenues from the oil sector, then the economy would be in serious trouble,” he said.

So far, the situation does not seem too dire for Gabon, a country that investors consider more politically stable than many others in Africa and that in 2007, issued a very popular 10-year sovereign Eurobond that restructured its external debt obligations. Investors have also taken note of the large public investment program that will continue to improve infrastructure, as well as the improvement in and the prospects for the overall business environment and the labor market. Non-oil growth is expected to remain robust, according to the most recent review of Gabon carried out by the International Monetary Fund (IMF), as new sources of growth emerge, including in Special Economic Zones that have been set up by the government to invite and encourage both private-sector and foreign investment.

“Gabon is beginning to show some signs of being interesting in areas other than hydrocarbons,” said Daniel Broby, chief investment officer at the investment firm Silk Invest in London. “The macroeconomic numbers represent no barrier to investment since Gabon’s current account surplus may be as high as 10.2% of GDP, but external public debt is an immaterial 13.1% of GDP. However, the next step for the country is still the development of its natural resources—gold, manganese and other metals—and this is important as its oil production capacity is diminishing and peak oil theories abound.”

Indeed, as oil production in mature fields continues to decline, analysts expect Gabon’s current account surplus to deteriorate over the medium term.

Further exacerbating the situation is that Gabon does not have any real safeguard to protect against any downturn in its oil-dependent economy.

“Even countries like Angola and Nigeria have put in place stabilization funds for a rainy day,” Paget-Blanc said, “but although Gabon did create a strategic fund in 2011 to save some of its oil revenues, only a minimal amount has been placed in there, and it is not sufficient to buffer the economy and sovereign profile against oil price volatility.”

Although the government’s plan to diversify the economy away from oil is the right move for the long term, Gabon still has a long way to go before being able to consider diversification in any meaningful way, and needs to put in the place the proper foundations such as infrastructure, which is sorely lacking in any part of the country besides the capital, Libreville, Paget-Blanc said. Everything needs to be developed from scratch, he says, and while the country is starting to do that, “there is a risk of moving too fast and incurring too much expenditure.”

And natural resource wealth aside, Gabon still has a long way to go in terms of improving overall governance and accountability. Indeed, the country ranked 102nd out of 174 nations in Transparency International’s 2012 Global Corruption Report.